A letter of intent (LOI), written in business letter format, declares that you intend to do a particular action. Letters of intent are used by business and investors that wish to do business with other businesses and investors.
It is usually non-binding and states that one party has committed to doing business with another. A letter of intent is similar to a memorandum; a non-binding document often precedes intent binding agreements.
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A letter of intent is a formal document that expresses your intent to do something. You could also use it to clarify specific points in a business transaction. If a job candidate is interested in working for a company, they might send a letter. However, they may not be applying for a particular job. A letter of intent may be submitted along with a general job application.
A letter of intent signifies that you are interested in the other party. It shows respect and professionalism. The letter of intent states your intentions but does not create a business agreement.
A letter of intent between businesses allows individuals to communicate their intentions without requiring lawyers. It also helps avoid costly legal fees and avoids them having to deal with lawyers. Although the document is not a legally binding agreement, it shows good faith.
An LOI can be used by anyone, regardless of whether they are working alone or in a larger company. A letter of intent can be used by anyone, regardless of whether they are working independently or as part of a larger organization. It is similar to a personal pitch. It states the individual’s intention to accept an opportunity. However, it does not set any terms for a proposed transaction or count towards due diligence.
Businesses must exercise due diligence before entering into any transaction. Businesses must take reasonable steps to comply with specific legal requirements. These details can include information about the purpose, the transaction amount, the cost, and the date it is expected to occur. However, it can also cover other areas.
Sometimes, a letter of intent is referred to as:
Although they will differ for each situation, letters of intent should provide a clear roadmap to all parties. These letters of intent set out goals, expectations, and terms, such as the timeframes for possible transactions, to help two or more parties better understand the potential business deal structure. It makes it easier for the parties intend to identify any deal-breakers and binding contract items that could be important in the future. A letter of intent template can help ensure that nothing is missed.
You can look at an example letter of intent to see what you should include, starting with the salutation and subject line to the signature.
These are just a few examples of letters of intent that you might find helpful:
When two parties meet to discuss the basics of a deal, LOIs can be helpful. Many LOIs include clauses stipulating that a deal can only be completed if the financing and the papers have been signed by a specific date.
Iterative LOIs are possible. A party might present an LOI to the other. The latter party can either respond with a modified LOI or create a new document. The idea is that there won’t be any surprises when the parties meet to finalize the deal.
Many LOIs contain nondisclosure agreements (NDAs), which contractually specify the parts of a deal each party agrees to keep secret and may be shared with the public. Many LOIs include no-solicitation provisions that prohibit one party from poaching employees of the other.
A letter of intent is typically drafted and signed during negotiations. This means that final terms may differ from those agreed upon in the letter. Both parties must conduct due diligence before entering into any business relationship. Before signing a letter stating intent, it is a prudent business practice to do your due diligence.
Different parties can use letters of intent for different purposes. An LOI can be used by parties to lay out the fundamental terms of an asset purchase agreement before they begin negotiations and finalize details. The LOI can also indicate that two parties are in negotiations for a deal, such as a merger (JV).
LOIs are designed to accomplish the following:
The company’s legal department usually drafts LOIs. This outlines the specific actions to be taken. In mergers and acquisitions, LOIs outline whether a company plans to acquire another company with cash or through a stock transaction.
Letters of intention can also be used in areas other than the business world. Parents can use them to communicate their expectations for their children in case of death. Family court judges may consider LOIs even though they aren’t legal documents such as wills. However, they can be used to help determine what happens to the children in these circumstances.
These LOIs can also be used by those seeking government grants and highly sought-after high school varsity sports athletes. These people often draft LOIs to confirm their commitment to attending particular colleges and universities.
Letters of intention are not legal terms of art. Their effects are dependent on how they were constructed. It is, therefore, important for legal professionals to inform clients about the potential risks associated with using a letter stating intent.
It is better not to start work before there is an agreement on the terms. Parties who agree to start work with a letter should consider the possibility of a formal contract not being concluded. They also need to ensure that risk allocation provisions are in place.
To learn more about other terms commonly used in venture capital, check out our complete VC Glossary.